Push for Broadband Sales Tax Exemptions Brings Mixed Success

Exemptions were considered in 14 legislatures, including Wyoming’s, this and last year, and adopted by five, said Scott Mackey, a wireless industry consultant on tax issues and an economist with the KSE Partners government affairs firm in Montpelier, Vermont. As they have in Wyoming, proponents argue nationally that most states do not charge sales tax on manufacturing equipment, he said. By taxing cables and other broadband equipment, he said the industry is “discriminated” against at a time when states want to encourage broadband deployment. For the wireless industry, sales tax expenditures that could go toward deployment have gained importance as companies try to “keep up” with efforts like Google Fiber to build high-speed Internet networks, he said. The tax exemptions have run into concerns in legislatures “because of the fiscal impact,” Mackey said.

In Minnesota, lawmakers this year approved House File-1777 (http://bit.ly/1ltsfms) restoring a sales tax exemption on office and other types of equipment for broadband companies. Lawmakers stopped short of extending it to other types of equipment like cables or cell towers, largely out of concerns for state funding, said Minnesota Telecom Alliance CEO Brent Christensen.

In Wyoming, where the HB-65 (http://bit.ly/1kwLyGE) failed this year, the legislative Interim Revenue Committee began studying this month whether to bring the exemption before the Legislature when it reconvenes next year, said Republican Sen. Cale Case. He is a member of the committee and was a staff member with the Illinois Commerce Commission, that state’s utilities regulatory body, from 1984-'87.

Tax exemptions were approved in Colorado (HB 14-1327) (http://bit.ly/STJqSO) this year and in Mississippi (SB-2829) (http://bit.ly/1kwNBub), North Dakota (SB-2142) (http://1.usa.gov/1lttUbs), and Texas (HB-1133) (http://bit.ly/1nBRcvM) last year, Mackey said. Proposals failed in Idaho (HB-603) (http://bit.ly/1ltutCd), Maine (LD-916) (http://bit.ly/1nBRvXl), Maryland (HB-563) (http://bit.ly/1nBRVNr), Rhode Island (HB-7745) (http://bit.ly/1xVF0LO), and Washington (SB-6322) (http://1.usa.gov/1mSJ2vI), this year, and last year in Arkansas (HB-2164) (http://bit.ly/1qI0pTV) and Kansas (HB-2255) (http://bit.ly/1jpazE3). In Louisiana, lawmakers approved a resolution (SCR-91) (http://bit.ly/1kTDSTJ) calling for a study on the revenue impact. Texas’ exemption caps the total amount statewide of such taxes at $50 million a year, although supporters are hoping it will be increased in subsequent years, said Jose Camacho, Texas Telephone Association legislative director.

Pros and Cons

Proponents argue that in addition to providing jobs through broadband deployment, the tax exemptions would benefit other industries that rely on broadband. “In 28 states, sales taxes on the purchase of broadband equipment are diverting resources that otherwise could be invested in network deployment and leading to faster speeds, more coverage, and higher capacity,” said Russell Sarazen, T-Mobile national director-state legislative affairs, in an October blog post (http://bit.ly/1hRn9kh).

Wyoming’s Case is skeptical. Industry lobbyists have told him privately the impact of the exemptions depends on how companies budget capital investments, he said. They would benefit companies that divvy up a set amount by region, so avoiding the sales tax would mean more could be spent on deployment, he said. The exemption would have less of an impact on companies that allocate funds based on what projects cost, he said. “They're kind of saying [the exemption] wouldn’t change our behavior very much.” He questioned whether the exemptions are enough incentive to build in high-cost rural and underserved areas like Wyoming. Another concern is the cost in public dollars, and that exemptions are often times are granted without any specific goal, said Dan Neal, executive director of the Equality State Policy Center, a Wyoming government accountability organization. “There should be goals and benchmarks that say specifically, ‘This is what we will achieve with this, and if we don’t, we'll pay back the taxes we should have been paying.’ “

Legislative proposals granting exemptions don’t have to be tied to goals, Mackey acknowledged, but said companies would only get the exemption by buying equipment for the networks. Whether it will spur deployment in rural areas is a long-time question, he said, but “urban and suburban areas are going to get [deployment] anyway.” Where the subsidies have an impact is with “marginal products that would not have gotten done” otherwise, he said. He cited a 2012 report to the Broadband Tax Institute (http://bit.ly/1nBTVFt) that said eliminating the broadband equipment sales tax could generate $1.48 billion per year for promoting broadband deployment nationally. It said when companies budget money regionally, more projects are done in states within the region without the tax than those with one.

"When states are trying to encourage broadband investment, antiquated tax policies drive up the cost of investment by imposing millions in taxes on routers, switches, and all the equipment needed to upgrade broadband networks,” an AT&T spokeswoman said of the Wyoming proposal. Nationally, she said, “As federal and state grants incentivize broadband deployment, it is counter-productive to increase the cost of investment by taxing equipment purchases.”